Maximise your tax deductions on car expenses

Date: February 25 2013

Max Newnham

There are many ways to claim a tax deduction for car expenses. Some require little to no record-keeping, while others mean keeping a detailed log book for 12 weeks.

Q. My wife and I are about to buy a used car and trade in our current car, which is registered in my name. I am a self-employed consultant (sole trader) and use the business kilometres travelled method to claim an income tax deduction for my business use of the current car. If we register the newly purchased car in my wife's name, will this affect my ability to claim tax deductions for future business use of the new car?

A. For you to be able to claim a tax deduction for car expenses you must either own or jointly own the vehicle. I am not sure why you want to register the replacement car in your wife's name. If you want to claim a tax deduction for your business use you should at least register the car in your joint names.

If the car is jointly owned, and your wife will be using it for business or employment-related travel, she will also be able to use the kilometre method to claim a tax deduction as well.

The kilometre method of claiming a car tax deduction relates to the individual claiming the tax deduction and does not relate to the vehicle itself. This means you could claim up to 5000 kilometres of business use of the vehicle and your wife could also claim up to 5000 kilometres of business or employment use.

If the car will not be used by your wife for tax-deductible purposes you might want to consider using the one-third of running cost method to claim your car expenses. Under this method where a car travels more than 5000 kilometres a year on business, one third of all of the running costs can be claimed as a tax deduction.

Running costs include fuel, repairs and maintenance, registration, insurance, lease costs, interest on loans taken out to purchase the vehicle, and the write-off of the cost of the vehicle by way of depreciation. If the cost of the replacement vehicle is high enough, and if your business use will be more than 5000 kilometres, the tax deduction you can claim could be greater under the one third of running costs method.

For example, the maximum claim that you can make under the cents per kilometre method for the 2013 year is $3750. Given that depreciation on a $35,000 car at 30 per cent is $10,500, it would not be hard to exceed $11,250 in total expenses for the car that would result in the one third of running cost method producing a greater tax deduction.

Questions on small business tax or other issues can be emailed to business@taxbiz.com.au "Tax for small business, a survival guide", by Max Newnham is available in bookstores and as an ebook.